Finance
by Thornton O'Glove
Are the profits real?
A company can report rising profits while its business quietly weakens. Thornton O'Glove spent years warning professional investors about exactly that gap in his newsletter. This book teaches anyone to ask how good a company's earnings are, and how much of them will turn up again next year.
Hear a sample · read by Laura
Two companies can report the same profit and deserve very different prices. For O'Glove, good earnings come from the ordinary business, can be repeated and end up as cash. Poor ones lean on one-off gains, generous estimates and accounting choices.
The glossy annual report is written to impress. O'Glove goes to the duller filings companies must make to the regulator, the 10-K and 10-Q in the US, and reads the footnotes. That is where the less flattering details tend to sit.
Receivables are money customers owe but haven't paid. If they grow much faster than sales, O'Glove warns, the company may be offering easy terms to push goods out, or booking sales too early. Either way, some of today's profit may never arrive as cash.
When inventory grows faster than sales, goods are sitting unsold on shelves and in warehouses. O'Glove reads it as an early sign that demand is cooling. Price cuts or write-downs tend to follow, and they come out of later profits.
Profit can jump for reasons that have nothing to do with trading. Selling a building or a drop in the tax rate can lift a year's earnings. O'Glove strips such items out to see what the business earned from its ordinary work.
Reported profit
The profit a company reports can be very different from how well the business is really doing.
Fine print
Read the footnotes and the fine print, because that's where the real story tends to hide.
Receivables
When money owed by customers grows faster than sales, the sales may be weaker than they look.
Inventory
Unsold goods piling up faster than sales grow often warn that profits will soon fall.
Depreciation
Stretching the life of assets to cut depreciation can lift profit without selling a thing more.
One thing to try
Pick a company you know and open its latest annual accounts. Find how much sales grew and how much receivables grew. If customers' unpaid bills rose much faster than sales, look in the notes for the reason. O'Glove would want one.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Quality of Earnings comes with a Spot the Trap case to make it stick.
Get the whole book on KnotdOpen in the appAre the profits real? A company can report rising profits while its business quietly weakens. Thornton O'Glove spent years warning professional investors about exactly that gap in his newsletter. This book teaches anyone to ask how good a company's earnings are, and how much of them will turn up again next year.
What quality means; Skip the glossy pages; Receivables racing ahead; Stock piling up; Gains that won't repeat.
Pick a company you know and open its latest annual accounts. Find how much sales grew and how much receivables grew. If customers' unpaid bills rose much faster than sales, look in the notes for the reason. O'Glove would want one.
Yes. Knotd has the key ideas from Quality of Earnings in a few minutes, in plain words, plus a Spot the Trap case to test them. It's one of 250+ non-fiction books in the app.
